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7 reasons rising interest rates won’t be bad for business
For more than two years, some economists and prominent investors have been predicting a rise in interest rates. They have yet to be right in terms of timing, and interest rates remain low — but sooner or later interest rates will rise.
When this does happen, alarmists will preach doom and gloom, citing higher individual interest payments on household debt, increased borrowing costs for businesses, and share price declines as investor money flows from equities into bonds and other interest-earning investments.
When the worm turns, so to speak, the news will not be all bad. In fact, here are seven reasons for employees to not fear a rise in interest rates:
Rising interest rates usually flow in tandem with rising inflation. Rising inflation normally allows companies to increase prices. Since costs are a subset of revenues, as both grow equally in percentage terms, companies stand to earn more on their bottom line. Banks and other financial institutions stand to do very well, as their cost of borrowing all those hundreds of billions of dollars from retail investors is that much lower than the rates at which they are able to lend these funds out.
2. New jobs
Companies that are earning more, are able to invest more, even after inflation is factored in, and some of those investments are going to be in new jobs and higher pay for employees.
3. Better pay
Speaking of pay for employees, although it’s been many years since company salary budgets have grown by more than zero to three per cent each year, many of us still recall a time when annual salary increase budgets were north of 10 per cent. Since inflation rises and falls, a growth in fixed base pay, helped along by inflationary cost of living increases, will cause longer term salaries to grow as salary increases range from five to more than 10 per cent each year. Very good news for those with housing in expensive locations like Vancouver, Toronto, and our neighbours in Manhattan, San Franscisco, and L.A.
4. Investing in growth
Companies will invest more in growth. Expect to see further and substantial investments in new products, services and markets as company revenues and earnings increase. These investments will serve to drive production costs down as these new products and services reach critical mass, which helps to lower costs of goods and services even as salaries are increasing.
5. Government reduces costs
Governments will get their financial houses in order. Several governments at local and national levels are carrying debt loads that are at dangerous levels, and yet continue to spend freely, since interest costs on all of that debt are quite low. As interest rates rise, governments will have to choose between increasing taxes or reining in spending. Although governments will tack on some additional taxes (increased sin taxes; increased user fees), income and sales taxes are pretty much maxed out, meaning that governments will have to lower their spending. Ultimately, this should lead to more efficient/effective government and the possibility of lower taxes down the road as debt loads are reduced.
6. New opportunities
There will be some bubble bursting, with respect to companies whose market cap is way out of sync with both their revenues and profits or reasonable expectations for same. Think back to the dotcom implosion at the turn of the millennium and you’ll know what I mean. The good news here though is two-fold:
i) many of the incredibly talented people working at these companies will be freed up to work in more relevant companies, desperately in need of talent, as the workforce shrinks due to the exiting of baby boomers;
ii) overheated share prices in some companies will normalize, providing investment opportunities for Gen X and Gen Y individuals just starting to invest in their future.
7. Equity will persevere
Finally, speaking of share prices, companies that are currently issuing low-interest bearing debt rather than shares to acquire companies, will shift to using equity in such transactions, which will reduce debt, debt ratios, borrowing-related expenses, and make companies more impervious to potentially fatal shifts in future interest rates that might cause the companies to be unable to meet creditor demands… or even make payroll.
Overall, I think that we are in a good place. Economies are strengthening, living standards are improving, and regardless of what happens around interest rates, the prospects for these continuing are good.
Will rising interest rates mean doom for Canadian businesses?
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About the author
David Wexler heads up a Human Capital Consulting firm of the same name. David leverages his many years of proven expertise in building recognized market leading healthy corporate working environments in public sector, private sector, and crown corporations, across Canada, and in multiple countries world-wide to assist organizations looking to introduce or enhance Human Capital strategies that contribute measurably to overall business success.
He can be reached at david(at)davidwexlerconsulting.com
Filed under: business, david wexler, employment, finance, interest rates Tagged: business, david wexler, employment, finance, interest rates